Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries

Timothy Lane, Francesco Caselli and Silvia Ardagna

No 4661, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use a panel of 16 OECD countries over several decades to investigate the effects of government debts and deficits on long-term interest rates. In simple static specifications, a one-percentage-point increase in the primary deficit relative to GDP increases contemporaneous long-term interest rates by about 10 basis points. In a vector autoregression (VAR), the same shock leads to a cumulative increase of almost 150 basis points after 10 years. The effect of debt on interest rates is non-linear: only for countries with above-average levels of debt does an increase in debt affect the interest rate. World fiscal policy is also important: an increase in total OECD-government borrowing increases each country?s interest rates. Domestic fiscal policy continues to affect domestic interest rates, however, even after controlling for worldwide debts and deficits.

Keywords: Government deficit; Public debt; Long-term interest rates (search for similar items in EconPapers)
JEL-codes: E44 E62 H62 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2007)
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2007)
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2005)
Working Paper: Fiscal Discipline and the Cost of Public Debt Service: Some Estimates for OECD Countries (2004)
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